Inheriting an Individual Retirement Account (IRA) can be a confusing process. For starters, the account arrives by definition under unfortunate circumstances, and processing paperwork may be the last thing on a beneficiary's mind. In addition, there are strict rules and regulations to follow in calculating distributions on an inherited IRA, and especially for a novice investor, these can be difficult to compute. The IRS gives specific instructions on how to perform these calculations, but if they still prove difficult, you can always consult a tax or financial advisor for help.
Check for spousal privileges. If you are the spouse of the deceased, you can take the inherited IRA and treat it as if it were your own. What this means is that you can use your own age, rather than the age of the deceased, to figure out what your required minimum distribution will be. To calculate what distribution needs to be made on your life expectancy, if any, refer to Table III, Appendix C of IRS Publication 590 (at IRS.gov). Divide the total value of your inherited IRA as of the last day of the year by the figure in Table III corresponding with your age; the resulting figure will be your required minimum distribution (RMD).
Discover if the deceased owner was taking distributions. If you are not the spouse of the deceased, your first step will be to determine the IRA owner's distribution status. If the owner died on or after the age of 70-1/2, the age at which IRA distributions become mandatory, then you must base your beneficiary distributions on either your life expectancy or that of the deceased, whichever is longer. If the original owner died before beginning RMDs, then the beneficiary computes the distribution based on his life expectancy, as found in Table III, Appendix C of Publication 590.
Ask about fellow beneficiaries. If you were not the sole beneficiary of the inherited IRA, special rules apply. If each of the multiple beneficiaries received their own inherited IRA account by the end of the year following the original owner's death, then each beneficiary can calculate their distributions according to the rules in Step 2. If, however, the deceased IRA remains intact, then the distribution amount for all beneficiaries is based on the one with the shortest life expectancy.
If the deceased was already taking RMDs, then an RMD must still be made in the year of the owner's death, based on his life expectancy.
- If the deceased was already taking RMDs, then an RMD must still be made in the year of the owner's death, based on his life expectancy.
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